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Fizzled Pepsi Deal Raises
More Flags on China Deals

By

Peter Wonacott and

Karby LeggettStaff Reporters of The Wall Street Journal

Updated Aug. 15, 2002 12:01 a.m. ET

BEIJING --
PepsiCo Inc.'s
attempt to terminate a Chinese joint venture through arbitration in Europe is a timely reminder of the risks posed by government-mandated tie-ups in China, as the nation's membership in the World Trade Organization opens it to foreign investment in new areas.

At one of its 14 Chinese bottling ventures, in the southwestern city of Chengdu, Pepsi alleges the venture partner, Sichuan Radio & Television Development Co., spent lavishly, brokered unauthorized deals and threatened Pepsi's auditors when they showed up to check the books.

Pepsi, of Purchase, N.Y., has applied for arbitration in Stockholm, where it believes it can ensure a fair hearing, rather than in China. Sichuan Radio has agreed to participate, but it contends it abided by its contract with Pepsi and rejects charges of financial mismanagement.

Though Pepsi's venture is small -- it was capitalized at $2.5 million when it was set up in 1994 -- the dispute highlights a major area of friction for foreign business. For years, the government has used joint ventures to crack open new industries and revitalize rusting state-run companies. As investment rules were relaxed, many multinational companies bought out their Chinese partners to eliminate management headaches.

But with China's entry into the WTO, a fresh generation of joint ventures is on the way as Beijing orders the pairing up with Chinese partners in industries ranging from product distribution to fund management. Pepsi's problems reveal anew the risks of such arranged marriages.

Pepsi's difficulty comes amid an upturn in business after two decades in China. While
Coca-Cola Co.
still has a 45% chunk of China's soft-drink market, to Pepsi's 21%, executives said an advertising and marketing blitz is paying off. Pepsi has an edge on its rival in six major Chinese cities and new traction in two of China's biggest markets, Shanghai and Beijing, said Wah-Hui Chu, president of Pepsi's China business unit. It has even managed to dominate Sichuan, China's most populous province and home to the troubled Chengdu joint venture.

Still, Sichuan Radio faults Pepsi for certain business decisions, including a rejection of the Chinese partner's proposal for a line of juice drinks.

Pepsi's anger has focused on Hu Fengxian, the venture's chairman, who is accused of expensing unauthorized Mercedes cars and vacations to Europe. "The allegations are groundless," said Mr. Hu, adding that in a recent provincial-government audit, the company did fine.

"Eight years ago, Sichuan was a world of red Coca-Cola," added Mr. Hu. "Now it's a sea of blue Pepsi."